The European Central Bank (ECB) published a report on October 29, 2012 regarding virtual currency schemes with a specific focus towards Bitcoin.

This report summarizes the beginnings of currency as a medium of exchange, a measure of value and a store of value. This report focuses on the growth of the internet and digital communication age and the potential transition period between conventional existing fiat currencies and the emergence of virtual currencies like Bitcoin.

Virtual online communities like Second Life and World of Warcraft already have internal "closed virtual" currencies, but Bitcoin appears to be the first virtual currency to have broken the bounds of the virtual world and has emerged as the first real bridge between the virtual and the real economic world.

Currently Bitcoin can be used to purchase actual products. See list of vendors that will accept Bitcoin for products and services.

The ECB report has summarized the Bitcoin currency itself in the following way.

"Bitcoins are not pegged to any real-world currency. The exchange rate is determined by supply and demand in the market. There are several exchange platforms for buying Bitcoins that operate in real time. Mt.Gox is the most widely used currency exchange platform and allows users to trade US dollars for Bitcoins and vice versa. As previously stated, Bitcoin is based on a decentralized, peer-to-peer (P2P) network, i.e. it does not have a central clearing house, nor are there any financial or other institutions involved in the transactions. Bitcoin users perform these tasks themselves. In the same vein, there is no central authority in charge of the money supply. As will be explained later, the money supply is determined by a specific type of “mining” activity. It depends on the amount of resources (electricity and CPU time) that “miners” devote to solving specific mathematical problems."

There are a few interesting quotes found throughout the article that stand out as direction to the potential future of virtual currencies...

"In an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted."

"[Bitcoin] could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly;"

Currently the world banking system is under intense pressure around the world to solve the global economic crisis. Since 2008, there has been little progress to resolve the underlying problems with the current fiat currency system. Perhaps the right time for the decentralized virtual currency has arrived?

Read the original source material for yourself SEE ATTACHED ECB REPORT.ECB Source Link